Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2017

[ ]

Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________ to ______________

Commission file number: 001-11174

MRV COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware

06-1340090

(State or other jurisdiction of

(I.R.S. employer

incorporation or organization)

identification no.)

20520 Nordhoff Street, Chatsworth, CA 91311

(Address of principal executive offices, zip code)

(818) 773-0900

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark, whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the standard transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

As of April 27, 2017, 6,801,130 shares of Common Stock of MRV Communications, Inc. were outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

MRV Communications, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Three Months Ended March 31,

2017

2016

Cash flows from operating activities:

Net loss

$

(1,041

)

$

(3,896

)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

399

500

Share-based compensation expense

415

347

Provision (reduction) for doubtful accounts

(60

)

7

Deferred income taxes

—

19

Changes in operating assets and liabilities:

Accounts receivables

(2,215

)

313

Inventories

(95

)

156

Other assets

(4,483

)

447

Accounts payable

(888

)

(196

)

Accrued liabilities

88

(491

)

Deferred revenue

(669

)

(793

)

Other liabilities

4,984

(136

)

Net cash used in operating activities

(3,565

)

(3,723

)

Cash flows from investing activities:

Purchases of property and equipment

(138

)

(282

)

Proceeds from sale of Tecnonet

—

4,789

(Increase) release of restricted time deposits

(12

)

20

Net cash provided by (used in) investing activities

(150

)

4,527

Cash flows from financing activities:

Proceeds from exercise of stock options

3

—

Purchase of treasury shares

—

(51

)

Net cash provided by (used in) financing activities

3

(51

)

Effect of exchange rate changes on cash and cash equivalents

4

6

Net increase (decrease) in cash and cash equivalents

(3,708

)

759

Cash and cash equivalents, beginning of period

25,116

26,169

Cash and cash equivalents, end of period

$

21,408

$

26,928

Supplemental disclosure of cash flow information:

Cash paid during period for interest

$

—

$

—

Cash paid during period for income taxes

$

28

$

60

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

MRV Communications, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization and Summary of significant accounting policies

Organization and nature of operations

MRV Communications, Inc. and subsidiaries ("MRV" or the "Company"), a Delaware corporation, is a global supplier of communications solutions to telecommunications service providers, data center operators, enterprises and governments throughout the world. MRV markets and sells its products worldwide, through a variety of channels, which include a dedicated direct sales force, distributors, value-added-resellers, systems integrators and sales agents. Until the third quarter of 2015, MRV conducted its business along two principal segments: the Network Equipment segment and the Network Integration segment. MRV's Network Equipment segment designs, manufactures, sells and services equipment used by commercial customers, governments, and telecommunications service providers. Products include packet switching, optical transport, infrastructure management equipment and service orchestration and provisioning software. The Network Integration segment, which primarily operated in Italy and provided network system design, integration and distribution services that included products manufactured by third-party vendors, was sold in December 2015.

On December 3, 2015, the Company completed the sale of all of its shares of its wholly owned subsidiary, Tecnonet S.p.A.("Tecnonet"), pursuant to a shares purchase agreement, dated as of August 10, 2015 (the "Purchase Agreement") with Maticmind S.p.A, a company incorporated under the laws of Italy. Tecnonet was the last business unit in our Network Integration segment. On February 19, 2016, the Company received a payment of €4.3 million (approximately $4.8 million) representing the post-closing purchase price adjustment pursuant to the Purchase Agreement.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of MRV and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.

The condensed consolidated unaudited financial statements included herein have been prepared by MRV pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The December 31, 2016 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The information included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, (this “Form 10-Q”) should be read in conjunction with the Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, (the “2016 Form 10-K”) filed with the SEC.

In the opinion of MRV's management, the unaudited interim financial information contained herein includes all normal recurring adjustments, necessary to present fairly the financial position of MRV as of March 31, 2017, and the results of its operations and cash flows for the three months endedMarch 31, 2017 and 2016. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the full year or any future periods.

Recently Issued Accounting Standards

We consider the applicability and impact of all Accounting Standards Updates (“ASUs”). The ASUs not listed below were assessed and determined by management to be either not applicable or are expected to have minimal impact on our consolidated financial position and/or results of operations.

7

In May 2014, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09") and in August 2015 issued ASU No. 2015-14, which amended the effective date of the standard to annual reporting periods beginning after December 15, 2017. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. During 2016, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). Management is continuing to assess the potential impact that adopting the new revenue standards will have on its condensed consolidated financial statements and footnote disclosures. The Company’s current analysis indicates that the most significant effect of the new standard relates to the Company's accounting for certain fulfillment and contract acquisition costs, which will now be capitalized, rather than expensed as incurred, which is the Company's current practice under the current guidance. In addition, the Company expects to continue recognizing product sales at a point in time and service revenue over time. While the Company continues its assessment of the potential effects of the new standard, management anticipates adopting the new standard on a modified retrospective basis effective January 1, 2018.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory" (“ASU 2015-11”). ASU 2015-11 simplifies the guidance on the subsequent measurement of inventory, excluding inventory measured using the last-in, first out (LIFO), or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value, and defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in ASU 2015-11 became effective in the first quarter of 2017. The Company adopted this standard on January 1, 2017, and the standard did not have a material impact on its condensed consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). The amendments in ASU 2015-17 simplify the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current. The amendments in ASU 2015-17 became effective in the first quarter of 2017. The Company adopted this standard on January 1, 2017, and the standard did not have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). The amendments in ASU 2016-02 require companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations generated by contracts longer than a year. ASU 2016-02 will become effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is required to be applied using the modified retrospective transition approach. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-02 will have on its condensed consolidated financial statements and footnote disclosures.

In March 2016, the FASB issued ASU No. 2016-09, "Stock Compensation (Topic 718): Improvements to employee Share-Based Payment Accounting" ("ASU 2016-09"). The amendments in ASU 2016-09 simplify the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in ASU 2016-09 became effective in the first quarter of 2017. Upon adoption of ASU 2016-09 on January 1, 2017, the Company recognized approximately $57,000 in share-based compensation charges that had not been previously recognized for forfeitures based on the expected forfeitures method. This additional share-based compensation cost was recorded through a cumulative-effect adjustment to beginning accumulated deficit on January 1, 2017. Management determined that none of the other provisions of ASU 2016-09 will have a material impact on its condensed consolidated financial statements.

8

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). The amendments in ASU 2016-15 adjust how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable, the Company would be required to apply the amendments prospectively as of the earliest date possible. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-15 will have on its condensed consolidated financial statements and footnote disclosures.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash — a consensus of the FASB Emerging Issues Task Force" (“ASU 2016-18”). The purpose of ASU 2016-18 is to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. Specifically, ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2016-18 should be applied using a retrospective transition method to each period presented. Early adoption is permitted. Management is currently evaluating the potential impact that adopting ASU 2016-15 will have on its condensed consolidated financial statements and footnote disclosures.

2.

Cash and Cash Equivalents and Restricted Time Deposits

MRV accounts for highly liquid investments with an original maturity of 90 days or less as cash equivalents. Investments with original maturities at the date of purchase greater than 90 days and remaining time to maturity of one year or less as short-term and are included in restricted time deposits. MRV maintains cash balances and investments in qualified financial institutions, and at various times such amounts are in excess of federally insured limits. As of March 31, 2017 and December 31, 2016, the Company's U.S. entities held $16.8 million and $19.2 million in cash and cash equivalents. The remaining $4.6 million as of March 31, 2017 and December 31, 2016, was held by the Company's foreign subsidiaries in foreign bank deposit accounts.

Restricted time deposits represent investments that are restricted as to withdrawal or use and from time to time may include certificates of deposit. The investments in and releases of restricted time deposits are included in investing activities on the Company's Condensed Consolidated Statements of Cash Flows. As of March 31, 2017 and December 31, 2016, the Company had $0.3 million of restricted time deposits, respectively, representing security deposits that are restricted due to their respective agreements.

3.

Fair Value Measurement

MRV's financial instruments, including cash and cash equivalents, restricted time deposits, accounts receivable, other receivables included in other assets and accounts payable are carried at cost, which approximates their fair value. The fair value of accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature.

The Company follows a framework for measuring fair value using a three-level hierarchy that prioritizes the use of observable inputs. The fair value hierarchy is divided into three levels based on the source of inputs as follows: Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs for similar instruments; Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Under this framework, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Management has not elected the fair value option for non-financial assets and liabilities.

MRV does not have any financial assets or liabilities that are remeasured at fair value on a recurring basis.

9

4.

Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents placed with high credit quality financial institutions, accounts receivable due from customers and other receivables.

Management evaluates the collectability of accounts receivable based on a combination of factors. If management becomes aware of a customer's inability to meet its financial obligations after a sale has occurred, the Company records an allowance to reduce the net receivable to the amount that management reasonably believes to be collectable from the customer. If the financial conditions of MRV's customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future. Accounts receivable are charged off at the point they are considered uncollectible.

The following table summarizes the changes in the allowance for doubtful accounts during the three months endedMarch 31, 2017(in thousands):

Balance at beginning of period

$

267

Reversed to expense

(60

)

Write-offs, net of amounts recovered

(29

)

Balance at end of period

$

178

5.

Inventories

Inventories are stated at the lower of cost or market and consist of materials, labor and overhead. Cost is computed using global standard cost, which approximates actual cost, on a first-in, first-out basis.

Inventories, net of reserves, consisted of the following (in thousands):

March 31, 2017

December 31, 2016

Raw materials

$

3,302

$

2,485

Work-in process

330

347

Finished goods

6,150

6,825

Total

$

9,782

$

9,657

6.

Intangible Assets

Intangible assets, net of amortization, consisted of intellectual property such as license agreements and totaled $1.0 million and $1.1 million as of March 31, 2017 and December 31, 2016, respectively. The terms of some of these license agreements provide for use of the licensed software into perpetuity while others are definite. The Company amortizes the cost of the license agreements over the estimated useful life, which can range between three to five years. Amortization expense related to intangible assets was approximately $81,000 and $61,000 for the three months endedMarch 31, 2017 and 2016, respectively.

The following table illustrates the estimated future amortization expense of intangible assets as of March 31, 2017 (in thousands):

Year Ending December 31,

Estimated Amortization Expense

2017

$

223

2018

247

2019

247

2020

149

2021

110

Thereafter

7

Total

$

983

10

7.

Other Current Assets

Other current assets include other accounts receivable, prepaid expenses and other assets that will be consumed or collected within a twelve month period. Other current assets as of March 31, 2017 and December 31, 2016 includes pre-paid expenses of $1.1 million and other receivables of $1.2 million and $1.3 million, respectively. Other current assets as of March 31, 2017, also includes insurance proceeds received by the Company subsequent to March 31, 2017, from its insurer in connection with the resolution of certain indemnification claims. These funds will be paid upon the satisfaction of certain conditions. (See Note 13, Indemnification Obligations)

8.

Product Warranty

As of March 31, 2017 and December 31, 2016, MRV's product warranty liabilities recorded in accrued liabilities was $0.6 million. MRV accrues for warranty costs as part of cost of sales based on associated material product costs, technical support labor costs and associated overhead. The products sold are generally covered by a warranty for periods of 90 days to three years.

The following table summarizes the activity related to the product warranty liability during the three months endedMarch 31, 2017 (in thousands):

Balance at beginning of the period

$

587

Reversed to expense

(14

)

Cost of warranty claims

2

Balance at end of the period

$

575

9.

Other Current Liabilities

Other current liabilities include customer pre-payments and reserves for sales returns that will be settled within a twelve month period. Other current liabilities as March 31, 2017 also includes the liability in connection with the resolution of certain indemnification claims. The liability will be released and paid with insurance proceeds received by the Company from its insurer subsequent to March 31, 2017, upon the satisfaction of certain conditions. (See Note 13, Indemnification Obligations)

10.

Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares of common stock ("Common Stock") outstanding, including restricted shares which, although they are legally outstanding and have voting rights, are subject to vesting and are treated as Common Stock equivalents in calculating basic net loss per share. Diluted net loss per share is computed using the weighted average number of shares of Common Stock outstanding and potential dilutive shares of Common Stock from stock options and warrants outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each period using the treasury stock method.

Employee equity share options, non-vested shares and similar equity instruments granted by MRV are treated as potential shares of Common Stock outstanding in computing diluted net income per share. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service not yet recognized, and the amount of income tax benefits that would be realized and recorded in additional paid-in capital if the deduction for the award would reduce income taxes payable are assumed to be used to repurchase shares.

11

The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):

Three months ended

March 31

2017

2016

Numerator:

Net loss

$

(1,041

)

$

(3,896

)

Denominator

Basic weighted average common shares outstanding

6,802

6,981

Effect of dilutive securities

—

—

Diluted weighted average common shares outstanding

6,802

6,981

Net loss per common share

Basic

$

(0.15

)

$

(0.56

)

Diluted

$

(0.15

)

$

(0.56

)

Outstanding stock options to purchase 583,806 and 386,729 shares of Common Stock were excluded from the computation of dilutive loss per shares for the three months endedMarch 31, 2017 and 2016, respectively, as they were anti-dilutive. Treasury shares are excluded from the number of shares outstanding.

11.

Share-Based Compensation

MRV records share-based compensation expense based on fair value at the grant date. The following table summarizes the impact on MRV's results of operations of recording share-based compensation for the three months endedMarch 31, 2017 and 2016 (in thousands):

Three months ended

March 31,

2017

2016

Cost of goods sold

$

15

$

42

Product development and engineering

59

76

Selling, general and administrative

341

229

Total share-based compensation expense (1)

$

415

$

347

(1)

Income tax benefits realized from stock option exercises and similar awards were immaterial in all periods.

No stock options or restricted shares were granted during the three months endedMarch 31, 2017 and 2016.

As of March 31, 2017, the total unrecognized share-based compensation balance for unvested options, net of expected forfeitures, was $2.0 million and is expected to be amortized over a weighted-average period of 1.6 years.

Valuation Assumptions

MRV uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The Black-Scholes model requires the use of subjective and complex assumptions, including the option's expected life and the underlying stock price volatility. MRV bases volatility on the Company's historical quoted prices and peer company data. The expected term of options granted is based on the simplified method, using the mid-point between the vesting term and the original contractual term. The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.

12.

Geographic Information

12

Following the completion of the sale of the Tecnonet business unit on December 3, 2015, MRV now has one reportable segment: Network Equipment.

The following table summarizes revenue by geographic region for the three months endedMarch 31, 2017 and 2016 (in thousands):

Three months ended March 31:

2017

% of revenue

2016

% of revenue

Revenue:

United States

$

11,271

53

%

$

9,041

48

%

Americas (Excluding U.S.)

2,403

11

%

1,290

7

%

Europe

3,593

17

%

3,197

17

%

Asia Pacific

3,908

19

%

5,354

28

%

Total

$

21,175

100

%

$

18,882

100

%

A significant percentage of the revenues generated in the Asia Pacific region are derived from Australia and accounted for 17% and 25% of our consolidated revenue for the three months endedMarch 31, 2017 and 2016, respectively. Revenues generated in Europe and the Americas (excluding U.S.) did not reflect any significant individual country concentration for the three months ended March 31, 2017 and 2016.

Significant Customers:

Revenue from one customer accounted for 17% of our consolidated revenue for both the three months endedMarch 31, 2017 and 2016. As of March 31, 2017 and December 31, 2016, amounts due from this customer accounted for 16% and 11% of our consolidated gross accounts receivables, respectively.

Revenue from another customer accounted for 14% of our consolidated revenue for both the three months endedMarch 31, 2017 and 2016. As of March 31, 2017 and December 31, 2016, amounts due from this customer accounted for 17% and 11% of our consolidated gross accounts receivables, respectively.

Long-lived Assets:

The following table summarizes long-lived assets, consisting of property and equipment, by geographic region (in thousands):

March 31, 2017

December 31, 2016

United States

$

2,065

$

2,336

Europe (1)

876

782

Asia Pacific

11

12

Total

$

2,952

$

3,130

(1) Includes Long-lived Assets held in Israel of $0.9 million and $0.8 million as March 31, 2016 and 2017, respectively.

13

13. Indemnification Obligations

In connection with the sale by MRV of Source Photonics, Inc. ("SPI") in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. Most of the indemnification obligations have expired; however, indemnification related to employee benefits, environmental liabilities and taxes extend until their applicable statute of limitations has run plus 90 days, and indemnification obligations are not time limited for title and ownership representations. These indemnification obligations are subject to a $1.0 million deductible and a $20.0 million cap, and we have purchased an insurance policy to protect against such obligations.

The Company has received a notice from SPI, advising the Company of a tax audit for periods including tax returns filed prior to the acquisition of SPI by the buyer. In April 2017 this matter was resolved. MRV does not anticipate any further material impacts upon its business, operating results or financial condition related to this matter. (See Note 17, Subsequent Events)

Our agreements for the sale of certain business (CES in March 2012, Alcadon and Interdata in October 2012, and Tecnonet in December 2015) include customary indemnification obligations to the respective buyers.

In connection with the sale of CES, MRV agreed to indemnify the buyer for the representations and warranties made in the sale purchase agreement and purchased an insurance policy to protect against any claims of indemnification related to the representations and warranties.

In addition, the Company has indemnification obligations to its current and former officers and directors as set forth in the Company's bylaws. We have agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we retain directors and officers insurance that reduces our exposure and enables us to recover portions of amounts paid. As a result of our insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.

No liabilities have been recorded for these indemnification agreements as of March 31, 2017 and December 31, 2016.

In the normal course of business to facilitate sales of its products, MRV indemnifies other parties, including customers, lessors and parties to other transactions with us, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representation or covenants, for intellectual property infringement, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.

We cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these obligations. Over the last decade, the Company has not incurred any significant expense as a result of obligations of this type. Accordingly, the Company has not accrued any amounts for such indemnification obligations. However, there can be no assurances that expenses will not be incurred under these indemnification provisions in the future.

We utilize several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. As of March 31, 2017 and December 31, 2016, the Company had outstanding minimum future commitments for manufacturing and component purchases which totaled $15.4 million and $14.2 million, respectively.

14

The Company records a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of its future demand forecasts. As of March 31, 2017 and December 31, 2016, the liability for these purchase commitments was $0.5 million and $0.4 million, respectively, and is included in accounts payable on the condensed consolidated balance sheets.

Litigation

We are subject to legal claims and litigation in the ordinary course of business, including but not limited to product liability, employment and intellectual property claims. The outcome of any such matters is currently not determinable. In addition, we were party to the litigation set forth below.

Nhan T. Vo, individually and on behalf of other aggrieved employees vs. MRV Communications, Inc., Superior Court of California, County of Los Angeles. On June 27, 2013, the plaintiff in this matter filed a lawsuit against the Company alleging claims for failure to properly pay overtime or provide meal and rest breaks to its non-exempt employees in California, among other things. The complaint seeks an unspecified amount of damages and penalties under provisions of the Labor Code, including the Labor Code Private Attorneys General Act. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. Management believes it has accrued adequate reserves for this matter and does not expect the matter to have a material adverse effect on its business or financial condition. However, depending on the actual outcome of this case, further provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.

From time to time, MRV receives notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. Management does not believe that any of these matters will result in a material adverse outcome.

MRV and its subsidiaries have from time to time been named as a defendant in other lawsuits involving matters that management considers routine to the nature of its business. Management is of the opinion that the ultimate resolution of such outstanding matters will not have a material adverse effect on our business, operating results and financial condition.

Cost Saving Measures and Asset Impairments

During the second half of 2016, the Company initiated cost saving measures intended to optimize its cost structure. These cost saving measures included consolidating facilities in Chatsworth, California which amounted to approximately $0.2 million, in addition to reductions in workforce which included one-time termination benefits of approximately $1.6 million. The costs of implementation were reported under cost of net revenues and operating expenses in the Consolidated Statements of Operations. Substantially all cash outlays in connection with these measures occurred in the third and fourth quarter of 2016.

As of March 31, 2017, activities related to these measures were substantially complete.

The changes in reserves associated with these measures for fiscal 2016 consisted of the following and are included in accrued liabilities on the accompanying Consolidated Balance Sheets (in thousands):

Severance and Other employee related costs

Facility Closures and Asset impairments

Balance at January 1, 2017

$

643

$

103

Cash payments made

(392

)

(26

)

Balance at March 31, 2017

$

251

$

77

15

15. Share Repurchase

On March 15, 2016, the Company's Board of Directors approved a repurchase of shares of the Company's Common Stock in an amount up to $10.0 million under a stock repurchase program scheduled to expire on March 10, 2017. On November 2, 2016, the Company's Board of Directors approved the termination of the Company's stock repurchase program. During the year ended December 31, 2016, the Company repurchased a total of 264,058 shares at a total cost of approximately $2.7 million, excluding commissions, under this stock repurchase program, leaving remaining authority to repurchase shares up to an additional $7.3 million, excluding commissions, under this stock repurchase program prior to its termination.

16. Income Taxes

The following table provides details of income taxes for the three months endedMarch 31, 2017 and 2016 (in thousands, except percentages):

Three months ended

March 31,

2017

2016

Loss before provision for income taxes

$

(995

)

$

(3,835

)

Provision for income taxes

46

61

Effective tax rate

(5

)%

(2

)%

The effective tax rate fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax. The income tax expense is primarily due to state minimum income taxes that do not benefit from our state net operating loss carryforwards and to income tax in foreign jurisdictions without net operating loss carryforwards.

As of December 31, 2016, MRV had federal, state and foreign net operating loss ("NOL") carryforwards available of $183.3 million, $112.0 million and $100.8 million, respectively. For federal and state income tax purposes, the NOLs are available to offset future taxable income, begin expiring in 2017 and are available through 2036. Certain foreign NOL carryforwards and tax credits are available indefinitely. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carryforwards existing at that time could be limited. As of March 31, 2017, the federal, state and foreign NOLs had a full valuation allowance.

On January 26, 2016, the Company's Board of Directors approved the adoption of a "Rights Plan" in an effort to protect the Company from potential adverse consequences arising under the Internal Revenue Code, such adverse consequences including a significant reduction in the annual utilization of the Company’s net operating loss carryforwards and built-in losses and the impairment or loss of the NOLs and built-in losses prior to their use.

17. Subsequent Events

In connection with the sale by MRV of SPI in October 2010, MRV agreed to indemnify the buyer against certain claims brought after the closing for prior-occurring events. The Company has received a notice from SPI, advising the Company of a tax audit for periods including tax returns filed prior to the acquisition of SPI by the buyer. In April 2017, this matter was resolved and the Company recorded insurance proceeds received subsequent to March 31, 2017, in other current assets with a corresponding liability recorded in other current liabilities on the March 31, 2017, Condensed Consolidated Balance Sheet. All legal and other fees related to this matter were expensed as incurred, and MRV has recorded no provision for recovery of costs on this matter. MRV does not anticipate any further material impacts upon its business, operating results or financial condition related to this matter.

16

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form10-Q, and Items 6, 7 and 8 of our2016Form10-K. The discussion in this Form10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may qualify for the safe harbor provided for in Section21E of the Exchange Act. We generally identify forward-looking statements as statements other than statements of historical fact and by use of such terms as “anticipate,”“appear,”“believe,” “contemplate,”“could,” “estimate,” “expect,”“intend,”“may,” “should,” “plan,”“project,”“target,” “foresee,” “goal,” “likely,” “will,” and “would,” or similar statements.

Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. In addition, the statements in this Form 10-Q may involve certain risks, uncertainties and assumptions, the likelihood of which are difficult to assess and may not occur, including risks that each of its business segments may not make the expected progress in its respective market, or that management's long-term strategy may not achieve the expected results. Other risks and uncertainties relate to delayed lead times in receiving components and delayed delivery times to customers due to short-term capacity constraints, potential changes in relationships with MRV's customers and suppliers and their financial condition, MRV's success in developing, introducing and shipping product enhancements and new products, competition in our market segments, market acceptance of new products and our ability to succeed in entering new markets, continued market acceptance of existing products and continued success in selling the products of other companies, product price discounts and general pricing pressure in certain of our markets, the timing and amount of significant orders from customers, obsolete inventory or product returns, warranty and other claims on products, the continued ability of MRV to protect its intellectual property rights and avoid onerous licensing fees, changes in product mix, maturing product life cycles, implementation of operating cost structures that align with revenue growth, political instability in areas of the world in which MRV operates or sells its products and services, currency fluctuations, changes in accounting rules, general economic conditions, as well as changes in such conditions specific to our market segments, maintenance of our inventory and production backlog, supply constraints directly or indirectly caused by natural disasters, litigation, including but not limited to patent infringement claims and litigation related to MRV's historical stock option granting practices.

In light of the risks and uncertainties inherent whenever matters or events expected to occur or not occur in the future are discussed, there can be no assurance that the forward-looking information contained in this Form10-Q will in fact transpire or prove to be accurate. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by this introduction. In light of the risks and uncertainties in all such projected operational matters, the inclusion of forward-looking statements in this Form10-Q should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company's operating expectations will be realized. Revenue and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this Form10-Q for the reasons detailed in Item 1A “Risk Factors” of Part I on the Company's 2016 Form 10-K and as set forth in item 1A of Part II of this Form 10-Q. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Form10-Q. The Company undertakes no obligation to amend this Form10-Q or revise publicly these forward-looking statements (other than pursuant to requirements imposed on registrants pursuant to Item 1A under PartII of Form10-Q) to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the SEC and the cautionary statements contained in our press releases when we provide forward-looking information.

Overview

At MRV, we design, develop and sell products and services that enable our customers to build reliable, scalable and cost effective networks. We develop our products and services to meet the needs of telecommunications service providers and cable operators (collectively “Service Providers”), data center operators, government entities and enterprises, including the education, financial, healthcare and equipment manufacturing segments in the Americas, EMEA and APAC. Our technologies, platforms and expertise enable our customers to overcome the challenge of orchestrating the ever-increasing need for capacity while improving service delivery and lowering network costs for critical applications such as high-capacity business services, mobile backhaul and data center connectivity.

17

Our business involves reliance on foreign-based offices. Several of our divisions, outside subcontractors and suppliers are located in foreign countries including; Argentina, Australia, Canada, Denmark, Germany, Israel, Italy, Netherlands, Philippines, Poland, Russia, Taiwan, Thailand and the United Kingdom. For the three months endedMarch 31, 2017 and 2016, revenue from foreign subsidiaries accounted for 20%, and 21%, respectively, of our total revenue. The majority of our foreign sales are to customers located in the Asia Pacific region and Europe with remaining foreign sales primarily to customers in the Americas (Excluding the U.S).

As of March 31, 2017, the Company had $21.4 million in cash and cash equivalents and $0.3 million in restricted time deposits.

On March 15, 2016, the Company's Board of Directors approved a repurchase of shares of the Company's Common Stock in an amount up to $10.0 million under a stock repurchase program scheduled to expire on March 10, 2017. On November 2, 2016, the Company's Board of Directors approved the termination of the Company's stock repurchase program. During the year ended December 31, 2016, the Company repurchased a total of 264,058 shares at a total cost of approximately $2.7 million, excluding commissions, under this stock repurchase program, leaving remaining authority to repurchase shares up to an additional $7.3 million, excluding commissions, under this stock repurchase program prior to its termination.

Critical Accounting Policies

Management's discussion and analysis of the Company's financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP").

The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and considers these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Revenue Recognition. Our major revenue-generating products consist of switches and routers, console management, physical layer products, and fiber optic components. We recognize product revenue, net of sales discounts, returns and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered reasonably assured. Products are generally shipped "FOB shipping point," with no right of return and revenue is recognized upon shipment. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company we use to deliver the product to the customer. Sales of services and system support are deferred and recognized ratably over the contract period. Sales to end customers with contingencies, such as rights of return, rotation rights and conditional acceptance provisions, are infrequent and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. For sales to distributors, we generally recognize revenue when product is sold to the distributor rather than when the product is sold by the distributor to the end user. In certain circumstances, distributors have limited rights of return such as stock rotation rights. We estimate and establish allowances for expected future product returns and credits. We record a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenue is recognized, and for future credits to be issued in relation to price protection at the time we make changes to our distributor price book. We monitor product returns and potential price adjustments on an ongoing basis and estimate future returns and credits based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition.

We generally warrant our products against defects in materials and workmanship for 90 days to three year periods. The estimated costs of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience.

18

Accounting for Multiple-Element Arrangements entered. We allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. The selling price we use for each deliverable is based on (a) vendor-specific objective evidence if available; (b) third-party evidence if vendor-specific objective evidence is not available; or (c) estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. We allocate discounts in the arrangement proportionally on the basis of the fair value of each deliverable.

Allowance for Doubtful Accounts. We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Actual future losses from uncollectible accounts may differ from our estimates because we cannot precisely predict future changes in the financial stability of our customers. If the financial condition of our customers deteriorates, resulting in their inability to make payments, a larger reserve may be required. In the event we determine that a change in the allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we make such a determination.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents placed with financial institutions and accounts receivable due from customers. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses.

Inventory. We make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record an adjustment to the cost basis equal to the difference between the cost of the inventory and the estimated net realizable market value. This adjustment is recorded as a charge to cost of goods sold, and includes estimates for excess quantities and obsolete inventory. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below previous estimates, we would make further adjustments in the period in which we make such a determination and record a charge to cost of goods sold. At the time of recording the adjustment, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration of, or increase in, that newly established cost basis.

Intangibles. We make judgments about the recoverability of intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Our ongoing consideration of all the factors described previously could result in additional impairment charges in the future, which could adversely affect our net income.

Income Taxes. As part of the process of preparing our annual financial statements, we estimate the income taxes in each of the jurisdictions in which we operate based on the estimated annual effective tax rate by jurisdiction. This process involves estimating the current income tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included in our Condensed Consolidated Balance Sheets. We assess the likelihood that our deferred income tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the income tax provision in the Condensed Consolidated Statements of Operations.

We utilize significant management judgment to determine the provision for income taxes, deferred income tax assets and liabilities, including uncertain tax positions and any valuation allowance recorded against net deferred income tax assets. Management periodically evaluates the deferred income tax assets as to whether it is likely that the deferred income tax assets will be realized. We establish a valuation allowance on the deferred income tax asset at the time we determine the asset is not likely to be realized. If we later determine that it is more-likely-than-not that a deferred tax asset will be realized, we release the valuation allowance and record a credit within the Condensed Consolidated Statements of Operations.

19

Share-Based Compensation. We determine the fair value of stock options using the Black-Scholes valuation model. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. Our estimates may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures and the related income tax impact. (See Note 9 “Share-Based Compensation” to the Financial Statements in Part 1, Item 1, of this Form 10-Q for further discussion.)

For further information around our critical accounting policies, please refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K.

Results of Operations

The following table sets forth, for the periods indicated, certain consolidated statements of operations data (dollars in thousands):

Three Months Ended March 31,

2017

2016

Revenue:

Product revenue

$

18,125

$

16,007

Service revenue

3,050

2,875

Total revenue

21,175

18,882

Cost of Revenue:

Cost of product

9,269

7,595

Cost of services

1,202

1,484

Total cost of revenue

10,471

9,079

Gross profit

10,704

9,803

Operating expenses:

Product development and engineering

4,728

5,344

Selling, general and administrative

6,768

8,017

Total operating expenses

11,496

13,361

Operating loss

(792

)

(3,558

)

Other expense, net

(203

)

(277

)

Loss before provision for income taxes

(995

)

(3,835

)

Provision for income taxes

46

61

Net loss

$

(1,041

)

$

(3,896

)

20

Three months ended March 31,2017 Compared to the Three months ended March 31,2016

Three months ended March 31:

2017

2016

$ Change

% Change

Revenue:

Product revenue

$

18,125

$

16,007

$

2,118

13

%

Service revenue

3,050

2,875

175

6

%

Total revenue

21,175

18,882

2,293

12

%

Cost of Revenue:

Cost of product

9,269

7,595

1,674

22

%

Cost of services

1,202

1,484

(282

)

(19

)%

Total cost of revenue

10,471

9,079

1,392

15

%

Gross profit

10,704

9,803

901

9

%

Operating expenses:

Product development and engineering

4,728

5,344

(616

)

(12

)%

Selling, general and administrative

6,768

8,017

(1,249

)

(16

)%

Total operating expenses

11,496

13,361

(1,865

)

(14

)%

Operating loss

(792

)

(3,558

)

2,766

(78

)%

Other expense, net

(203

)

(277

)

74

(27

)%

Loss before provision for income taxes

(995

)

(3,835

)

2,840

(74

)%

Provision for income taxes

46

61

(15

)

(25

)%

Net loss

$

(1,041

)

$

(3,896

)

$

2,855

(73

)%

Revenue

Revenue increased $2.3 million, or 12%, for the three months endedMarch 31, 2017, compared to the three months endedMarch 31, 2016, primarily due to a $2.1 million, or 13%, increase in product revenue and a $0.2 million, or 6% increase in service revenue. The increase in revenue in the United States and Europe was primarily the result of growth in demand in our service provider and data center interconnect markets for our systems and optical components. The decrease in revenue in the Asia Pacific region was primarily due to inventory adjustments impacting bookings in our largest service provider customer during the three months endedDecember 31, 2016. Conversely, in the Americas (excluding the U.S.), we experienced significant improvement as we witnessed an increase in demand from Tier 1 and Tier 2 customers primarily for our optical components.

The following table summarizes revenue by geographic region (in thousands):

Gross profit increased $0.9 million, or 9%, for the three months endedMarch 31, 2017, compared to the three months endedMarch 31, 2016, principally due to a $2.1 million, or 13%, increase in product revenue. The combined gross profit margin percentage for product and service revenues decreased 1.3 percentage points to 50.6% for the three months endedMarch 31, 2017, compared to 51.9% for the three months ended March 31, 2016. The gross profit margin percentage for product revenues decreased 3.7 percentage point to 48.9% for the three months endedMarch 31, 2017, compared to 52.6% for the three months endedMarch 31, 2016, while the gross profit margin percentage for service revenues increased 12.2% percentage points to 60.6% for the three months endedMarch 31, 2017, compared to 48.4% for the three months endedMarch 31, 2016. The 3.7 percentage point decline in product gross profit margin percentage was primarily a result of the mix of product sold and the geographic region sold into. The 12.2% percentage point improvement in service revenue gross profit margin percentage is related to capitalizing on the improvement efforts related to customer support and maintenance to enhance our customer experience that commenced in 2015, resulting in improved utilization of our fixed costs. Additionally, during the three months endedMarch 31, 2017 service inventory reserves were not as significant as they were in three months endedMarch 31, 2016 as the Company changed its estimate related to the useful lives of its service inventory in the second half of the 2016.

Operating Expenses

Operating expenses were $11.5 million, or 54.3% of revenue, for the three months endedMarch 31, 2017, compared to $13.4 million, or 70.8% of revenue, for the three months endedMarch 31, 2016. The $1.9 million, or 14% decrease in operating expenses for the three months endedMarch 31, 2017, compared to the three months endedMarch 31, 2016, were primarily driven by a $1.5 million decrease in labor expense due to decreased headcount. Additionally, operating expenses benefited from reduced other overhead expenses in the amount of $0.3 million for the three months endedMarch 31, 2017, compared to the three months endedMarch 31, 2016, driven by reduced occupancy expenses due to facility consolidation, reduced software maintenance expenses due to decrease in software needs and reduced provisions for bad debt due to improved collections.

Operating Loss

The Company reported an operating loss of $0.8 million for the three months endedMarch 31, 2017, compared to an operating loss of $3.6 million for three months endedMarch 31, 2016. The $2.8 million improvement in operating results was primarily the result of $2.3 million, or 12% increase in revenue. Our operating margin declined to (3.7)% for the three months endedMarch 31, 2017, compared to (18.8)% operating margin for the three months endedMarch 31, 2016. The operating loss included share-based compensation expense of $0.4 million and $0.3 million for the three months endedMarch 31, 2017 and 2016, respectively.

Provision for Income Taxes

The provision for income taxes for the three months endedMarch 31, 2017 was approximately $46,000, compared to $61,000 for the three months endedMarch 31, 2016, and was computed based on an estimated annual effective tax rate for the Company in each of the various tax jurisdictions we operate. Our income tax provision fluctuates based on the amount of pre-tax income or loss generated in the various jurisdictions where we conduct operations and pay income tax.

Liquidity and Capital Resources

During the three months endedMarch 31, 2017, the Company's cash decreased approximately $3.7 million to $21.4 million from $25.1 million. There were net cash outflows from working capital of approximately $3.3 million, including a $2.2 million increase in accounts receivable primarily due to timing of shipments during the quarter and cash receipts, a $0.8 million decrease in accounts payable and accrued liabilities as a result of timing of cash disbursements to component manufacturers and consultants, as well as cash payments related to headcount reductions implemented during the three months endedDecember 31, 2016. In addition, there was a $0.7 million decrease in deferred revenue due to timing of shipments, partially offset by cash inflows of $0.4 million, resulting from an increase in other long term liabilities primarily due to an increase in long term deferred service revenue. Net cash used in investing activities included $0.2 million in purchases of property, plant and equipment. Net cash used in financing activities were not significant during the three months endedMarch 31, 2017.

22

We periodically review our capital position and consider returning capital to stockholders through special dividends or share repurchases when cash on hand exceeds our foreseeable cash needs. We also periodically review the capital needs of our business units. We plan to invest approximately $2.0 million over the next 12 months to upgrade our infrastructure and equipment needed to support the Company's growth objectives in the Carrier Ethernet and optical transport markets among others. We believe that cash on hand will be sufficient to satisfy current operating needs, capital expenditures and product development and engineering requirements for at least the next 12 months. We may seek to obtain debt financing if we believe it appropriate. We may limit our ability to use available NOLs if we seek financing through issuance of additional equity securities.

Working Capital

The following table summarizes our working capital position (in thousands):

March 31, 2017

December 31, 2016

Current assets

$

54,998

$

51,718

Current liabilities

27,196

24,083

Working capital

$

27,802

$

27,635

Current ratio(1)

2.0

2.1

(1)

Determined by dividing total current assets by total current liabilities.

Off-Balance Sheet Arrangements

We do not have transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provided off-balance sheet financing, liquidity or market or credit risk support, engaged in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financials.

Contractual Obligations

During the three months endedMarch 31, 2017, there were no material changes in our contractual obligations.

Internet Access to Our Financial Documents

We maintain a website at www.mrv.com. We make available, free of charge, either by direct access or hyperlink, our Annual Reports on Form10-K, Quarterly Reports on Form10-Q, Current Reports on Form8-K and amendments to those reports filed or furnished pursuant to Section13(a)or 15(d)of the Exchange Act as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC's website at www.sec.gov.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our condensed consolidated financial statements through adverse changes in financial market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in foreign exchange and interest rates. We manage our exposure to these market risks through our regular operating and financing activities, and when deemed necessary, through the use of derivative financial instruments. The Company may from time to time use derivative financial instruments as risk management tools to manage risks of volatility in interest and foreign exchange rate movements on anticipated transactions and not for trading or speculative purposes and does not maintain such instruments that may expose the Company to significant market risk. During the three months endedMarch 31, 2017 and 2016 the Company did not use derivative financial instruments and as of March 31, 2017 and December 31, 2016, we did not have any such derivative financial instruments outstanding.

Foreign Exchange Rates. We operate on an international basis with revenues and expenses transacted in currencies other than the U.S. dollar. Fluctuation in the value of these foreign currencies affects our results and will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot predict the effect of exchange rate fluctuations upon future operating results. However, because we have revenues and expenses in each of these foreign currencies, the effect on our results of operations from currency fluctuations is reduced.

Certain assets and liabilities, including certain bank accounts, accounts receivables and accounts payables of some of our business units, exist in currencies other than the functional currency of the related business units and are sensitive to foreign currency exchange rate fluctuations. These currencies principally include the U.S. dollar, the Israeli new shekel, the Euro and the Taiwan dollar. When these transactions are settled in a currency other than the functional currency, we recognize a foreign currency transaction gain or loss.

When we translate the financial position or results of operations of subsidiaries with functional currencies other than the U.S. dollar, we recognize a foreign currency translation gain or loss as a component of other comprehensive income (loss). Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our results. We conduct a significant portion of our business in foreign currencies, the Israeli new shekel and to a substantially lesser extent, the Taiwan dollar and Euro. For the three months endedMarch 31, 2017 and 2016, 20% and 21% of revenue, respectively, and 36% and 35%, of operating expenses, respectively, were generated and incurred at foreign subsidiaries. For the three months endedMarch 31, 2017, the exchange rates for the Taiwan dollar strengthened 6% against the U.S. dollar compared to the three months endedMarch 31, 2016, so revenue and expenses in these currencies translated into slightly more dollars than they would have in the prior period. For the three months endedMarch 31, 2017, the exchange rates for the Israeli new shekel strengthened 4% against the U.S. dollar compared to the three months endedMarch 31, 2016, so revenue and expenses in these currencies translated into slightly more dollars than they would have in the prior period.

Fluctuations in currency exchange rates of foreign currencies have an impact on the U.S. dollar equivalent of such currencies included in cash and cash equivalents reported in our financial statements. The following table summarizes cash and cash equivalents held in various currencies and translated into U.S. dollars (in thousands):

March 31, 2017

December 31, 2016

U.S. dollars

$

19,388

$

22,923

Euros

90

194

Taiwan dollars

29

43

Israeli new shekels

1,197

952

Other

704

1,004

Total cash and cash equivalents

$

21,408

$

25,116

Macro-economic uncertainties. We believe that the past few years of sustained softness in the global economy has affected our revenues and operating results. When economic uncertainties increase, our customers often take a more cautious approach in their capital expenditures, resulting in order delays, slowing deployments, and lengthening sales cycles. This may lead to increased competition for projects and price pressures resulting in lower gross margins. Despite these economic uncertainties, we believe that our customers need to continue investing in their networks to meet the growth in consumer and enterprise use of high-bandwidth communications services. We believe in our longer term market opportunities, but we are uncertain how long the downturn in economic conditions will continue and how our customers will interpret and react to market conditions.

Item 4.

Controls and Procedures

As of March 31, 2017, under the supervision and with the participation of MRV's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of March 31, 2017, the Company's disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in MRV's periodic SEC reports.

There has been no change in our internal control over financial reporting during the three months endedMarch 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

24

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

We are subject to legal claims and litigation in the ordinary course of business, including but not limited to product liability, employment and intellectual property claims. The outcome of any such matters is currently not determinable. In addition, we were party to the litigation set forth below.

Nhan T. Vo, individually and on behalf of other aggrieved employees vs. MRV Communications, Inc., Superior Court of California, County of Los Angeles. On June 27, 2013, the plaintiff in this matter filed a lawsuit against the Company alleging claims for failure to properly pay overtime or provide meal and rest breaks to its non-exempt employees in California, among other things. The complaint seeks an unspecified amount of damages and penalties under provisions of the Labor Code, including the Labor Code Private Attorneys General Act. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. Management believes it has accrued adequate reserves for this matter and does not expect the matter to have a material adverse effect on its business or financial condition. However, depending on the actual outcome of this case, further provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.

From time to time, MRV receives notices from third parties alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the parties in an effort to demonstrate that MRV's products and/or processes do not violate any patents. Management does not believe that any of these matters will result in a material adverse outcome.

MRV and its subsidiaries have from time to time been named as a defendant in other lawsuits involving matters that management considers routine to the nature of its business. Management is of the opinion that the ultimate resolution of such outstanding matters will not have a material adverse effect on our business, operating results and financial condition.

Item 1A.

Risk Factors

There have been no material changes in the Company's risk factors that have been previously disclosed in Part I, Item 1A of the Company's 2016 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a) Exhibits

25

No.

Description

31.1

Certification of the Principal Executive Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)

31.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act (filed herewith)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized on May 3, 2017.

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